Income inequality

Interesting paper on income inequality out this week from the boffins at OECD. Particularly worth playing with the data in the graphical package Gapminder.

The main findings include:

• Income inequality rising since the 1980s in all countries along with increased social spending to offset it. This suggests if governments start to ‘let loose’, or fail to target poverty-reducing spending, income inequality will accelerate further.
  
  
• Income inequality rising since 2000 in countries like the US and Germany but falling in the UK and Australia. I tested this out on the historical data plotting poverty against social spending since the 1980s. Each bubble represents a year; I’ve added the green lines to highlight the change in most recent years. Of the four, the US has the highest rates of poverty, then Australia, Germany and the UK. Germany and the UK have traded places with a radical drop in poverty in the UK in recent years and coinciding rise in Germany. The UK’s cut appears to have cost an additional 3 percentage points of GDP on social spending; Germany’s rise has been while social spending has been pretty constant (presumably feedback from the structural and higher unemployment they’ve suffered in recent years).
  
  


• Getting more people in work is – unsurprisingly – found to be one of the major ways to reduce poverty, although capital inequality is now more significant in the past. This must be particularly so for those house buying, share-owning Anglo-Saxon economies.
  
  
• Growth and poverty is a more mixed story. The US and Australia have been growing but with rising inequality in recent years (albeit Australia from a much lower base). The UK has been growing but with sharply falling rates of inequality (albeit still higher than Australia).

Focusing solely on the Australian and UK trends for a second this does go some way to explaining in general terms where the two currently differ in political trends. The UK has cut poverty and inequality but the rising social spending this has cost is probably coming to an end and seems to have - for the present at least - maxed out taxpayers' willingness to spend. Meanwhile, Australia has had a long period of rapid growth, though the public now appear more willing to countenance higher spending on social security and public services to improve equity and fairness. I guess we'll find out what the US electorate think very soon...

American Journeys

I went along to the Brisbane Writers Festival today, a small but growing annual event. (Rather ironic for a collection of esteemed wordsmiths that the title glaringly omits the plural possessive apostrophe but never mind).

Most interesting was a talk by Don Watson, the speechwriter to former Prime Minister Paul Keating, author of a bestselling book on this period, and one of Australia’s rare genuine public intellectuals. His latest book, American Journeys, offers his poetic reflections travelling the US by rail.

There are a lot of obvious things to say about America but Don Watson says them with particular wit, power and charming anecdote. The main themes are America’s religiosity, boundless optimism, pragmatism and heterogeneity around a small number of very strong common values and symbols (like freedom, the flag, respect in the Office of the President).

With the exception of religiosity his talk stuck many a chord with my own reflections of Australia. Like America, there’s a palpable frontier spirit Down Under, people are judged more on what they do than what they think, the underdog is championed while success unabashedly celebrated, there are high levels of national pride, and material values and popular culture prevail.

Yet… there’s a much stronger emphasis on social welfare here, and money isn’t seen as everything, so perhaps Australia’s something more of a half way house between Britain the US. Anyhow, another good read from a smart man.

Randomised Policy Trials

Good paper from Australian economist Andrew Leigh on the merits of ‘Randomised Policy Trials’.

What’s the idea?

Essentially the idea is to use the more scientific approach to experimentation in the design of policy. So, rather than just rolling out an idea, or doing simple before-after analysis, policy makers would subject an idea to the scrutiny of controlled tests. For example, a new approach to school exams might be trialled in several schools in a way that attempted to hold constant for other factors that influence performance before extending on a national scale (of course only if it proved effective).

If it’s so simple why don’t we do it?

Andrew debunks a number of arguments made against randomised policy trials in social sciences. My take on the most compelling – but ultimately wrong – arguments against randomised trials:

• Because they might involve denying treatment to worthy individuals. Some would, for example, argue that it is unethical to deny all the opportunity to the new school exams if they were thought to be superior to what everyone else got. But try the counterfactual: surely it’s more unethical to try the new school exams on everyone, rather than a small group first.
  


• Because there are other alternatives. Yes there are other ways to test the effectiveness of policies. But all too often we get stuck in a simple before-after analysis. So the government claims success on the new school exams because results turn out to be higher than they were ten years ago. But, of course, it may not be the new exams that actually caused the increase in results, instead being a consequence of other things like school investment, better teaching or inflation in marking. Randomised policy trials are the most scientific way to isolate the causal effect of policy.
  


• Because qualitative results are better. A simple rejoinder to this is that doing quantitative trials doesn’t preclude doing the qualitative analysis too – surely we’ll get a better result from doing both together?
  


• Because politicians are interested in re-election, not results. I think this is perhaps a slightly harsh phrasing that Leigh uses but probably gets to the heart of the problem. There are strong incentives for politicians to roll out and start doing. After all, elections come around pretty quickly and no-one is interested in a small scale pilot if the rest of the system is failing. Yet clearly over the long-term this leads to sub-optimal policy paths being taken.

Anyhow it turns out that it is in the US where most randomised policy trials occur, with Canada and the UK a little behind. Would be interesting to see this as a proportion of all new policies though – I suspect it’d be pretty low…

Affluenza

I met with the authors of the Australian book ‘Affluenza’ recently.

What’s the book about?

The argument is a familiar one. The Western world is in the midst of a consumption boom – we’ve never had it so good with seemingly unlimited availability of new goods and services to meet our wants and desires. We measure and define our progress on GNP indicators of economic growth. Yet, there’s little evidence we’ve become happier for it (see chart below). Indeed rates of depression and stress continue to rise. And meanwhile we run down the world’s resources at an alarming and unsustainable pace.

It’s trendy to think this is something new that humankind has hit on. It’s not – it goes back at least as far as the Epicurean school in 4th century BC ancient Greece. Of course, the lines of argument have evolved and changed since but the fundamental question about the relationship between material wealth and human happiness remains.

Is anything different now?

Yes, at least to some extent. First, prosperity has been growing at historically unprecedented rates since the industrial period and particularly since the Second World War. Essentially the first 6,000 years of human history were punctuated by marginal gains in wealth followed by major slumps and setbacks. So the last fifty years gives us a good opportunity to assess things.

Second, the science about what makes us happy and the evidence linking wealth and happiness has got much better. For example, lots of interesting findings are coming out of the field of neuroscience alone. Third, the sustainability trends have started to get really quite irreversible, particularly of course on climate change.

Time for a grand alternative?

This is where books and theories like ‘Affluenza’ rapidly deteriorate, as they amateurly try to create a grand-alternative narrative. It’s too easy to fall into the unthinking tradition of left-liberals from Hampstead. The consumer-orientated, economic-centric model of society won because its arguments are simple, powerful and complete. So it’s not a midnight session ‘solving the world’ over a bottle of Bordeaux, or a Hippie-like tendency to say ‘why don’t all businesses start being nice’, that’s going to make any difference. More to the point there isn’t any sufficiently robust alternative that can be systematically used for policy development. Indeed, that’s self evident in the terms of the debate – an offensive on materialism rather than promotion of a coherent set of rival solutions.

Give up and resign ourselves to a never-ending spiral of rising wealth but growing misery and depletion of the environment?

Personally, I think there’s much to be said for taking an admittedly less sexy but more focused approach to the debate. What might this involve?

First, some subtle shifts that have potential to add up to something more substantive:

• Let’s try to develop and mainstream some alternative measures of progress. The UK DEFRA’s attempt to look at wellbeing is to be welcomed even if it’s little known within Whitehall let alone beyond at the moment. Linked to this we also need some more systematic policy-testing of what the science and evidence on happiness is telling us. (We need to get over our social fear of randomised policy trials for a start).
  
  
• Reintegrate economic thought with other social sciences. The post-war debates between the likes of Milton Friedman and Ludwig von Mises against the Keynesian and Galbraithian schools were not just about what the right economic models were, but also how to think about economics. The legacy of which was the sad divorce of economics from other social sciences in which its roots lay (particularly politics, philosophy, psychology, sociology and geography). I think reintegrating the practice of economics with the developments of these other social sciences could start leading us some different policy conclusions – like the importance of making short-term transitionary adjustments to effects like globalisation or the value of labour market policies to reduce the harshness of tradeoffs that people have to make between work and leisure and family.
  


• Invest in community and public assets. A clear trend in the evidence is that we systematically over-invest in the individual things we think will make us happy (DVDs, clothes, cars, homes) but under-invest in some of the community and social assets that also contribute to our happiness. So it might sound old-fashioned but actually having high quality parks, civic institutions, public spaces and cultural activities is important to happiness and something government needs to initiate to overcome the free-riding problem.
  


• Teach young people some broader social and emotional skills. There’s long been an obsession with teaching the skills that most contribute to productivity. The focus on science, maths and literacy and numeracy is broadly the logical result of that. As too are political calls to meet the challenges of globalisation through developing ‘hard’ skills. All of course right in part but we shouldn’t under-value the importance of personal and social education – providing young people with the skills in order to make better choices later in life that will impact on their happiness and life satisfaction.

Second, a focus on reducing unhappiness, misery and want:

• Attack on the scourge of mental health. This was Lord Layard’s focus in his book on ‘happiness’ and there’s actually some positive developments here like the UK Government’s commitment to fund cognitive behavior therapy (e.g. see Scotland's recent initiative). I think this is only a start to tackling not just the high rates of mental illness we find today (one in six people will suffer from depression at some point in their lives) but also the attached social stigma.
  


• Prioritise health activity on long-term conditions and other ‘life-course’ ill health events. Proportionally too much health activity is on the visible, event based, and invasively-solved ill health. But, like mental health, there are 17 million people in the UK suffering from long-term conditions that materially impact on their quality of life. Getting really serious about this (and not just a few words about care planning) could have a dramatic impact on their wellbeing.
  


• Don’t surrender the fight on poverty and disadvantage. I think one of the as yet under-recognised achievements of New Labour was the shifting of the terms of debate on poverty. Admittedly, progress has been mixed (e.g. on child poverty), and in some cases has got worse (e.g. on relative inequality). But the Thatcherite legacy of implicit social acceptance of poverty in society is now in retreat. Even Cameron’s Conservatives now too have social and community policies where they would once have been unthinkable to them. The progressive left needs to continue to push the fight and not surrender this territory.

I’d meant to keep this one short but it’s already become too long and I haven’t started to do the topic justice. So I’ll stop for now and return to at another point…

Australian Politicians (1): Paul Keating

I've been reading a book called 'The Longest Decade' by a journalist called George Megalogenis. It weaves together the history of two of Australia's recent Prime Ministers, Paul Keating and John Howard and is a great read.

I never knew much about Keating before (he was Labor's last PM before Rudd) but I've discovered he's quite a legend. I'm already a big fan.